Phillips 66 Aiming to Overtake Valero Energy through Notable Purchase, Boosting Chances for Market Dominance
Phillips 66 (NYSE:PSX), a leading energy company, has made significant strides in its turnaround efforts, as evidenced by its latest moves. The acquisition of the Wood River and Broger refineries, along with operational improvements, has positioned the company for a promising future.
The Wood River and Broger refineries, now under full ownership by Phillips 66, have an industry-leading cost structure. This acquisition, made in 2023, added 250k barrels per day of refining capacity to Phillips 66's Central Corridor. The Central Corridor, known for its leading cost advantage, boasts reported operating costs of just $2.77/barrel.
The increased exposure to the Wood River and Broger facilities has resulted in a 45% increase in Central Corridor volumes. This, coupled with improvements in utilization and clean product yield, has contributed to a quarterly uplift in pre-tax income of roughly $400 million for the company. Over the course of a year, this equates to over $1.6 billion in additional income.
In Q2 of the latest year, Phillips 66's utilization reached a record high of 98.3%. This, combined with the reduction in operating cost per barrel from previous years, has brought Phillips 66's operating cost per barrel in 2024 down to $5.90.
To further optimize its portfolio, Phillips 66 has decided to close its LA refinery, which has high operating costs compared to other refineries in its portfolio. This move is expected to bring down Phillips 66's average operating cost per barrel in 2026. The company will also no longer be required to log a quarterly loss of $240 million associated with the accelerated depreciation from the LA refinery closure.
These changes are expected to translate into an annual earnings rate of approximately $10/share for the company, giving Phillips 66 a forward P/E ratio of approximately 13x. At a tax rate of 20%, this translates into an annual EPS gain of over $3/share.
Analysts, with estimates developed from 20 separate analysts, have a strong conviction that these estimates are in the right ballpark. This positive outlook, coupled with a significant growth rate and a respectable dividend at 3.6%, has led to a BUY rating for PSX.
The acquisition of the Wood River and Broger refineries could potentially allow Phillips 66 to challenge Valero Energy Corporation as the best in the industry. With these strategic moves, Phillips 66 is well on its way to achieving its turnaround goals and delivering value to its shareholders.
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